Sometimes, Things Really Are Different This Time

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The four most dangerous words in investing are said to be "It's different this time." Someone uses them at the peak of every bubble to justify ignoring lessons of the past. 

But being unshakably wary of "it's-different-this-time" arguments has its drawbacks. Some things really do change over time. Paradigm shifts can legitimately amend old rules and assumptions. There's an old rule of thumb that the economy needs to create 150,000 jobs a month just to keep up with population growth. That's not the case anymore, because the population is getting older and fewer Americans are of working age. Today we need closer to 100,000 jobs to keep up with population growth, so a jobs report that looked weak two decades ago might actually be pretty good today. We can say "it's different this time" because it really, actually is.

This goes for stocks, too.

The market will crash again someday. Maybe soon. It just does that from time to time. The S&P 500 seems fairly valued at best. Perhaps a little overvalued.

But be careful when using long-term history to value the stock market. It could lead you to erroneously think stocks are in a huge bubble without realizing valuation metrics that worked in the past may need adjusting. Why? Because some things have changed. It really is different this time. 

Take these two.

1. The percentage of S&P 500 sales made abroad has more than doubled
About 23% of S&P 500 sales came from outside the United States in 1990, according to J.P. Morgan. By 2003 that was up to 41%. Last year, 47% of S&P 500 sales came from abroad.

That's a real change in how companies make money. You can't just ignore it. Any historical analysis of S&P earnings or market capitalization as a percentage of the U.S. economy is misleading unless adjusted for the surge in global sales that's taken place over the past two decades.

Take a popular metric these days: corporate profit margins.

If you take corporate profits and divide them by U.S. GDP, you get a crude measure of profit margins that looks way above the historic average. But using U.S. GDP as a denominator doesn't make sense when U.S. companies have doubled the share of business they do overseas in the past 20 years. Use world GDP as a denominator, and margins don't look that high at all:

Source: IMF, World Bank, Federal Reserve, Bureau of Economic Analysis. 

2. The dividend payout ratio has plunged
In the 1973 version of his classic book The Intelligent Investor, Ben Graham wrote:

Years ago it was typically the weak company that was more or less forced to hold on to its profits, instead of paying out the usual 60% to 75% of them in dividends. The effect was almost always adverse to the market price of the shares. Nowadays it is quite likely to be a strong and growing enterprise that deliberately keeps down its dividend payments.

There's been a strong shift in companies paying out less of their earnings as dividends over the past century. From the 1930s through the 1980s, companies usually paid out half their earnings as dividends, often far more. Today the average payout ratio is around 30%:

Source: Robert Shiller, author's calculations.

This matters. It can't be ignored when comparing the current market with the past. To me, it is one of the best explanations for why the CAPE valuation metric has been above its long-term average in all but nine months of the past 22 years. 

When companies are paying out less of their earnings as dividends, they are using the leftover cash for share buybacks, acquisitions, or internal growth, or they're just leaving it in the bank.

In any of those situations, future earnings growth, or current book value, will be higher than it otherwise would have been if the payout ratio hadn't declined. That affects valuations. A company that pays out all of its earnings in dividends should trade at a lower valuation than one that uses part of its earnings to buy back shares or invest in its future. 

Apple (NASDAQ: AAPL  ) , for example, has a market cap of $470 billion, and nearly $150 billion of cash and marketable securities in the bank. So about one-third of its current market value has nothing to do with the prospect of future earnings. Instead, it represents past earnings waiting to be paid out (to be fair, repatriation taxes need to be considered as well). These kinds of stories didn't exist in the world Graham describes. And it can make Apple's P/E ratio and other valuation metrics look misleadingly high, especially when compared with long-term history.  

Saying "it's different this time" is dangerous. But so is assuming nothing ever changes, and that the past is a perfect prologue. "If past history was all there was to the game," Warren Buffett once quipped, "the richest people would be librarians." 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

Read/Post Comments (24) | Recommend This Article (54)

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  • Report this Comment On November 04, 2013, at 6:30 PM, constructive wrote:

    US corporate profits / US GDP is not ideal, but it still makes more sense than US corporate profits / global GDP.

    It seems that the appropriate way to calculate corporate profit margins is clearly not top down but bottom up.

  • Report this Comment On November 04, 2013, at 9:10 PM, LovePeace wrote:

    Great insight as usual.

  • Report this Comment On November 04, 2013, at 11:46 PM, MartyTheCanuck wrote:

    Thanks again Morgan. You're not only good at explaining difficult stuff, but you're truly thinking outside the box and helping us a lot.

  • Report this Comment On November 05, 2013, at 8:12 AM, deckdawg wrote:

    I don't think the relationship between interest rates and stock valuations has changed. I believe it was Graham who said "rising interest rates are like gravity for stocks".

  • Report this Comment On November 05, 2013, at 8:26 AM, cmfhousel wrote:

    ^ Remember, from 2003 to 2007 interest rates rose from 1% to 5%, and stocks nearly doubled.

    There is a strong relationship between interest rates and PE ratios from 1960-2006, but from 1900 to 1960 there's almost no relationship at all. Treat that as you may. More here:

  • Report this Comment On November 05, 2013, at 10:26 AM, TMFDanDzombak wrote:

    Why not use GNP

    Gross national product (GNP) is the market value of all the products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership

  • Report this Comment On November 05, 2013, at 10:44 AM, cmfhousel wrote:


    Not a bad point, although I'm not sure that sales to a foreign subsidiary of a US domiciled company would be included in GNP. Eyeballing the statistics, I'm led to believe they are not.


  • Report this Comment On November 05, 2013, at 9:06 PM, bscx wrote:

    I think this analysis is faulty. You argue that this time is different because the % of SP500 sales from abroad doubled from 1990 to 2012. However, it had first doubled by 2007 and has been essentially flat since then:

    2003 - 41.84%

    2004 - 43.75

    2005 - 43.26

    2006 - 43.55

    2007 - 45.84

    2008 - 47.94

    2009 - 46.57

    2010 - 46.29

    2011 - 46.14

    2012 - 46.59

    source [pdf]:

    We can see, using long-term metrics, that, for instance, price/revenue is roughly where it was at around the 2007 peak, and that market value of non-fin stocks/nominal GDP is also roughly where it was in 2007. Yet when those points were reached before, stocks were about to collapse by more than 50%, despite nearly half of SP500 sales coming from abroad, just like today, so I don't see how all the foreign sales means stocks might not be highly overvalued like they were in 2007. It may be different this time, but how do foreign sales explain it?

    With regard to the margins chart: Is using World GDP as the denominator really appropriate in order to adjust for increased foreign sales? If the blue line is overstating margins (and their upside deviation from long-term levels) given the increased percentage of sales coming from abroad, isn't it because the numerator includes the profits from those foreign sales, while the denominator is purely US GDP? Wouldn't the proper adjustment be to use US GDP + US corp foreign sales in the denominator? Or alternately, to strip out foreign-sourced profits from the numerator with US GDP in the denominator? That would give you either US-sourced profits over US spending, or US- and non-US-sourced profits over US- and non-US spending, and showing margins somewhere between where they lie on the blue and red lines in the chart.

  • Report this Comment On November 05, 2013, at 9:14 PM, cmfhousel wrote:


    Thanks for your comments -- they are well informed.

    I do disagree with the assertion that individual year data rebuts my chart. Yes, foreign sales are about the same from 2007-2012. But so are overall margins (using US as a denominator) as the chart shows. In fact, overall margins were 10% in 2007 and 10.5% in 2012, while foreign sales rose from 45.8% to 46.6% -- a larger jump than overall margins!

    And, yes, I think it's fair to say using world GDP as a denominator overstates. Reality, like most statistics, lies somewhere in the middle.


  • Report this Comment On November 05, 2013, at 9:17 PM, cmfhousel wrote:

    Also, I think it's dangerous to say the 50% crash in 2008 was due to stocks being overvalued. It was due to a specific shock: the financial system falling apart. Nasdaq in 2000 -- that was a crash caused by valuation. But the S&P recouped all of its losses within 3 years after 2008. Hard to say that's a valuation event.

  • Report this Comment On November 05, 2013, at 9:21 PM, cmfhousel wrote:

    ^ I should say, overvalued for long-term investors. I'm confident those who bought stocks in October 2007 will end up earning a good return by October 2017. Those who bought the Nasdaq in 2000 won't be able to say the same.

  • Report this Comment On November 06, 2013, at 10:38 AM, slpmn wrote:

    I think someday you should do a focused analysis on the pros and cons of dividends vs. stock buybacks and building up cash. Because your assertion that "A company that pays out all of its earnings in dividends should trade at a lower valuation than one that uses part of its earnings to buy back shares or invest in its future." is at best a gross oversimplification, and at worst, wrong. Maybe you've already presented the analysis and I just missed it, in which case I'd like to have the links. Of course, you did say "all" of its earnings as dividends, which is a special and very rare case. In reality, there's some optimal level of value-maximizing payout ratio for each company, but I would suggest it is never zero.

    Overall, good stuff as always.

  • Report this Comment On November 06, 2013, at 6:07 PM, xetn wrote:

    The big problem with GDP is it includes government spending. Since government does not produce anything, but only consumes, it is a false measurement.

  • Report this Comment On November 07, 2013, at 7:37 AM, gkirkmf wrote:


    I have a small quibble with your characterization of government as producing nothing.. Sludge from waste treatment plants, roads and bridges for commerce, research, and most important, police to maintain fair markets (well in theory anyway). There are probably others that you can think of... say enriched uranium for reactors...

    This by the way is not meant to comment on the EFFICIENCY of government... that is another story.

  • Report this Comment On November 07, 2013, at 12:13 PM, stevews99 wrote:

    Morgan: Excellent article! I appreciate your valuable insight.

  • Report this Comment On November 07, 2013, at 2:50 PM, SkepikI wrote:

    Morgan: Another corker... I believe this could be your best think-piece to date, judging only by the fact I am still trying to wrap my brain around it.

    Reading the commentary its generated, easily puts it over the top as one of your best.

    I have long been a dividend proponent even when the income tax penalty made it a bad exchange, because of the simple fact I have trouble trusting most managements to stick to their knitting AND use steely eyed analysis combined with sharp pencils ensuring their internal ROI are excellent and realized in execution. These have been disturbingly rare IMHO.

    I am still mulling over if some of the commentary and some of the article have confused or maybe blurred cause and effect. When an economic crisis happens to reset values, AND the businesses of enterprises both nearly collapse, who is to say what fair value really was pre-collapse.

    I will note for the record that SOME business enterprises maintained their margins and value quite well as evidenced by their quick recovery followed by steady improvement. These businesses were "on sale" in the crisis. Others were artificially propped up, or went to the ash heap of history. I need to think some more about your excellent points to determine their relevance to my particular bias and situation. A very good service....Thanks

  • Report this Comment On November 07, 2013, at 3:08 PM, SkepikI wrote:

    Morgan: Very likely one of your best "think-pieces" judging only by the fact I am still trying to wrap my brain around it.

    As a long time dividend proponent, I will take under advisement your view of the value additive proposition of low payout ratios. There are indeed many examples of excellent management teams who deploy capital well and deserve higher values because they repeatedly invest in their business at outstanding ROI's and then actually EXECUTE to achieve them. Unfortunately, the opposite examples are distressingly all too common, so this is not a universal truth in the S&P. The index is just full of examples of management teams that either do not correctly analyze OR fail to execute properly to achieve what was analyzed.

    Still, its made me stop and examine my dividend bias for possible reconsideration. An excellent service.

  • Report this Comment On November 07, 2013, at 3:10 PM, banmate7 wrote:

    Let's cut to the chase. The main signals for a crash are tied to valuations or leverage. Moreover, there's a difference in the severity between these.

    The crash of 2008 was far more devastating than the crash of 1999. The former was highly leveraged. The latter wasn't. In fact, the former had valuations that weren't too high.

    There have been 2 catastrophic crashes in modern American history. 1929 and 2008. Again, the common denominator was extreme leverage. This is the main signal for an impending devastating crash. High valuations are a signal for a lesser crash or correction.

    I've prospered through 1999 and 2008, basically applying value investing. I also factor in that any 20 year period in stock history in the US has featured a 9% annual return in the S&P500.

    Nothing has changed in this regard. These are the salient factors, especially in dollar cost averaging in low cost index funds or value investing in individual blue chip stocks. The rest is noise.

  • Report this Comment On November 07, 2013, at 3:10 PM, SkepikI wrote:

    ^ excuse the duplicate comments... some strange short in the ether beyond the 15 min delay caused me to think my first comment was lost....

  • Report this Comment On November 07, 2013, at 3:26 PM, banmate7 wrote:

    Let me give you an example of value investing working even through leveraged market crashes. I made investments in Trinity (TRN) on the basis of PE, PEG, PS, and PB in the context of cash flow & balance sheets. Suffice it to say, it was very undervalued relative to its trailing averages, even smoothing for the dot com era.

    Additionally, Warren Buffett was a secular signal, as he invested in BNI. I immediately looked for value in the rail supply chain. Hence I bought TRN and CNI, both of which have given me returns crushing the S&P500 in the same time period.

    Here is my TRN investment. The big ones are basis investments, the smaller ones are reinvested dividends:

    date shares total_cost share_price

    08/17/2007 150.0 $4,958.95 $33.06

    10/31/2007 0.293 $10.50 $35.84

    11/28/2007 200.0 $5,241.95 $26.21

    01/31/2008 0.896 $24.52 $27.37

    04/30/2008 0.79 $24.58 $31.11

    07/31/2008 0.725 $28.16 $38.84

    10/31/2008 1.706 $28.22 $16.54

    01/30/2009 2.421 $28.35 $11.71

    04/30/2009 1.886 $28.55 $15.14

    07/31/2009 2.026 $28.70 $14.17

    10/30/2009 1.655 $28.86 $17.44

    01/29/2010 1.824 $28.99 $15.89

    04/30/2010 1.139 $29.14 $25.58

    07/30/2010 1.437 $29.23 $20.34

    10/29/2010 1.292 $29.34 $22.71

    01/31/2011 1.061 $29.45 $27.76

    04/29/2011 0.819 $29.53 $36.06

    07/29/2011 1.134 $33.30 $29.37

    10/31/2011 1.203 $33.40 $27.76

    01/31/2012 1.059 $33.51 $31.64

    04/30/2012 1.143 $33.60 $29.40

    07/31/2012 1.456 $41.20 $28.30

    10/31/2012 1.325 $41.36 $31.22

    01/31/2013 1.053 $41.50 $39.41

    04/30/2013 0.997 $41.62 $41.75

    07/31/2013 1.266 $49.31 $38.95

    10/31/2013 1.145 $57.09 $49.86

    total shares: 381.751

    current value: $19,644.91

    This is about a 100% return compared to a at best 30% for the S&P500 in the same time period. This emphasis on value obviously put me in good stead in lieu of the crash of 2008. It did for the vast majority of my stocks, blue chips bought at value that have beaten the indices.

    I continue to invest this way. Again, value is value. The metrics, absolute and relative, are the same ones I have always used. Should I change anything, now that "things are different"?

    I am not being sarcastic. But in 25 years of investing, I've come across many assertions of fundamentally changing how we value things, only to see them smashed asunder. Worst of all, I see many folks systematically get fleeced by new paradigms that basically amount to wealth transfer.

    Let me posit one example here: cloud computing, especially software as a service. Amazon, SalesForce, WorkDay, LinkIn, and Twitter get sky high valuations on the basis of non-GAAP earnings and growth. Things have changed...but not for Oracle, Microsoft, IBM, and Apple, companies with immense cash flow, balance sheets, and a history of proven growth & earnings.

    Again, seems to me that things haven't changed so much...especially retail investors being fleeced by those pushing "this time it's different" investing paradigms.

  • Report this Comment On November 07, 2013, at 5:07 PM, CMFTomBooker wrote:

    Morgan your theses are like Chinese finger cuffs. it starts out as a seemingly harmless thing/observation. Then one puts their hands into it,... and two hours later they realize they're still tangled-up in it. ;)

    From the perspective of domestic corporations, the pie has certainly gotten larger in the past 50 years, particularly the past 20.

    My culture shock event was AAPL reporting in (calendar) Q4 2011. With the exception of one gluttonous oil patch display, the world had never seen Revs and Earnings like it before. And it was from sales of products with some on-going value to peoples' lives. (as opposed to a fast burn)

    The "World" got bigger that day, and I realized my imagination needed some serious broadening. Unfortunately for AAPL shareholders, they began to grasp the scale at play, but overshot AAPL's actual share of it.

    So global sales seem to make it bigger, but I don't know how much different. At some point growth slopes granted out 5 years, are going to get to 2 years, and realize it ain't gonna be as steep as they thought over the next three.

    The dividend change is too tangled up. Without a crystal ball, we can't tell if declining dividends mean different static or dynamic forms of value in the S&P,, or if the leaking source of the lion's share of the S&P Total Returns for 80 years, just means we're going to have crappier overall actual returns during this period.

    To tell the truth, the risk adjusted profile of "it's different this time" gets worse the larger the entity to which it is tagged. People will stick it to virtually anything with the exception of "the crash is coming". Because it always does.

    "Different" will earn new status when it finally whips that dog.

    Ya see,.. I don't think it's "different" this time.

    I think that we just might have had the wrong Monetary policy for 19 years. ;)

    We still don't know if the Central Banks are the symptom or the cure. ;)


  • Report this Comment On November 08, 2013, at 11:59 AM, SkepikI wrote:

    Morgan: After a great deal of thought on your points, I conclude that there is no fruitful way to see if your theory actually works in advance, and grave danger to old guys like me to test it in real time.

    Theory works, all well and good, my portfolio does a little better in the small amount of real time I have left. Theory crashes, lots of losses from traditional result of "its not really any different (again)" insufficient time to recover. So I guess I will just pretend that nothing has really changed, even if it has.

    I will make one further point on dividend payout ratio to you: Managements and people in general, no matter how good historically and no matter how well intended have shown a persistent talent for blowing their nestegg and destroying shareholder value in the process. Share buybacks only work better than dividends if the share price is LESS THAN FAIR VALUE, and as you have pointed out indirectly in this article, determining what is fair value is devilishly hard......

    My best guess is that for every AAPL that builds value by not paying dividends and either reinvesting in a sterling business or buying back shares, there are two Sears destroying shareholder value like a wild fire. We just never realize it in real time....

  • Report this Comment On November 08, 2013, at 4:51 PM, 092326 wrote:

    Is not the quality of the jobs being created as important as the quantity.

  • Report this Comment On November 08, 2013, at 7:21 PM, hbofbyu wrote:

    The same thing happened today that happened yesterday, only to different people.

    - Walter Winchell

    This time may be different. But don't bet on it.

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